Nanalyze

ICO Scams – How to Tell if an ICO is a Scam

Now that we’re starting to hear about some massive ICO scams, we figured that lots of people might be interested in knowing how to tell if an ICO is a scam. It’s something that 32,000 people wish they knew before giving those Vietnamese lads at “Pincoin” $600 million – which they promptly ran away with. Fortunately, our crack team of MBAs helped us put together this guide on how you can identify ICO scams. It’s actually much easier than identifying over-the-counter (OTC) scams which we’ve been exposing for over a decade. If you’re losing sleep because you’re worried that the ICO you just invested your life savings in is a scam, we’re going to sort you out right now. First, let’s talk a bit about hype.

The Hype Behind New Technologies

Disruptive technologies are loads of fun to research and write about in their earlier stages, but once the hype train leaves the station heading towards bubble town, the process of trying to sift through all the marketing fluff pieces to find something meaningful becomes a chore. Take artificial intelligence for example. It’s completely out of hand. The CB Insights newsletter pointed this out some weeks back when they talked about the “AI for X” trend and gave this example:

Yes, it’s AI for horses. And you don’t even have to look very hard to see this stuff popping up everywhere. What about Boostinsider that uses machine learning to help you find “the world’s best social rockstars”. Really? You really want to find “social rockstars” like this piece of work? Then there’s Jane.ai, a year-old, St. Louis, Mo.-based artificial intelligence platform that says it makes “all of a company’s information accessible through chat”. Think there might be some compliance issues with that business model? Then there’s Brandora, the startup that wants to use AI to help you sell overpriced New Yawk real estate. We haven’t even made it through all of this morning’s AI news and already we can see that this technology is being hyped by just about everyone now.

It’s not just that these startups are trying to solve first world problems, it’s that now anyone can partner with any one of the +3,000 AI startups out there and suddenly they’re using AI to solve a problem. Suddenly everyone’s “using AI”, and it’s at that point that you know a technology has reached “peak hype”. While in the case of AI, there are sophisticated investors fueling the hype, imagine what it would be like if your average Joe was making decisions about which startups to fund. That’s precisely what’s happened now with ICOs, except what the average Joe is “funding” is literally just a piece of paper for which he receives nothing of value in exchange.

The Hype Behind ICOs

While AI seems to be approaching “peak hype”, it’s not even close to as bad as ICOs have become now. Even zee Germans are climbing on board, like this publicly traded German virtual reality (VR) stock that we were thinking about taking a closer look at – until we saw this isht:

Now, we’re not trying to badmouth this company at all. They have a reasonable idea of what the future might look like with VR, and even though things in VR have stalled a bit (as much as we love VR), they still have a vision of what things might be like. So why jump off the deep end and land on the ICO bandwagon? The answer might be that because capital is so easy to raise now, everyone is doing it. People are literally throwing their money at worthless tokens with zero regard for common sense. Let’s look at an even better example.

The VinChain ICO

Sometimes we like to daydream about business ideas, and like most people out there, we do absolutely nothing to execute on them because we’re too busy writing articles for you, our lovely readers. Today though, we thought about how useful it would be to track car titles using blockchain. While most Americans probably don’t own their cars, there’s still a great use case for blockchain here, right? The transactions wouldn’t happen very often, everyone would benefit from the traceability, and you wouldn’t have to buy a safe box just to store the title for your car. So, we quickly Googled “blockchain car title” and the first thing that came up was a startup called VINchain.

We recently wrote about Russian AI startups, so were pleasantly surprised to see that a bunch of Russians got together and created a really nice looking website and this white paper containing the usual platitudes about “changing the global market for used cars”, an idea which actually makes a whole lot of sense. It sure “sounds good on paper” as they say:

There’s even a reference made about using artificial intelligence, but just skip all that and go directly to page 42 where you will find the below statement:

The VINchain token is a utility token. VINchain tokens do not represent or confer any ownership right or stake, share, security, or equivalent rights, or any right to receive dividends, other payments, intellectual property rights, or any other form of participation in or relating to the project described in this white paper and/or in VINchain or any of its affiliates. The holders of VINchain token are only entitled to use VINchain products as described in this document if successfully developed, or to resell the tokens.

You can pretty much stop reading at this point because these “utility tokens” that you’re buying have no intrinsic value to them. Sure, there may be some time in the distant future that you can open up your digital wallet (which supposedly will contain a token for every single company’s products and services) and get out your VINchain coins to pay for the VIN service that VINchain might offer in the future. Of course, we already know that since 9 out of 10 startups fail, the odds that this ICO will succeed are slim to none. We already know that ICOs love to fail fast, and that more than half the ICOs that were funded in 2017 have already gone bust. Even if the coins contained actual equity in this venture, we’re still skeptical about the company’s ability to execute on their vision based on a cursory look at their team and white paper. There’s also competition, like German startup XAIN which just took in $7 million in seed funding last week and is working with Porsche to implement a blockchain solution for VIN tracking.

Of course if you choose to follow the sheeple down the yellow brick road, you’ll be comforted by the fact that everyone seems happy to throw their hard earned money at this thing:

The ICO was a successful one for VINchain, because based on today’s ETH price the team raised around $6.7 million, almost as much as XAIN did. The difference is that XAIN is working with major auto manufacturer and has the expertise of venture capitalists to help them navigate the hurdles that most startups face. While we wish the team at VinChain luck and hope they succeed, we’ll wait until after the product has traction before we go buying VinChain tokens to use their service. (On this note, does anyone actually know of any ICO where the tokens are being used today to buy the product or service today, as it was originally intended?)

How to Tell if an ICO is a Scam

As in the case of OTC companies, losing all your money is the likely outcome for ICOs. Does it really matter if the company’s management team was acting maliciously or was just incompetent? You still lost your money. If you want to find out if an ICO is a scam, just ask this one question.

Is this entity trying to sell me tokens actually going to give me equity in their operation? Or, am I just buying tokens that I can spend on their product which doesn’t exist yet except in the form of a white paper?

If you are not receiving any equity, then the best case scenario is that you spent money buying someone’s product or service before they even developed it, and without agreeing upon a price. That hasn’t worked out very well for the crowdfunding community, and it’s failing even more miserably for ICOs. An ICO that takes your money and offers you nothing of value in return is a scam – unless of course you’re a philanthropist who enjoys funding people’s business ventures without getting any equity in return.

We’ve written before about how ICOs are not an investment or an asset class. They provide enormous value for anyone who wants to create cash out of thin air by soliciting it from stupid people, but the buyers of these tokens are typically just exchanging their hard earned money for the “opportunity” to spend it on a product that hasn’t even been created yet at sometime in the future. It’s like crowdfunding but 100X worse because of how notoriously difficult it is to write good software. While there are some geniuses out there who are trying to attach ICOs to something that actually has value (like… equity), it’s just now being looked at.

Before you throw away your money buying ICO tokens, just ask if you’re getting any equity in the business you’re handing your money over to. If the answer is no, and it’s likely to be no because the SEC doesn’t allow that, then it’s a fcuking scam – not because the management team is acting maliciously, but because in the best case scenario, they’re going to give you back some product or service at a price that hasn’t been agreed upon at a point in time in the future that’s also not agreed upon. Oh, and the majority of ICOs fail. So yes, it’s a big scam. Don’t be one of the gullible marks that helps perpetuate it.

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